Under a little-publicized provision of the bill, clients would be
forced to sell their oldest shares first when cashing out of
positions, according to a report from Laura
Saunders of the Wall Street Journal. That would reduce
flexibility in terms of minimizing taxes, something that
investment firms fear could end up costing clients loads of
money.

The provision would make investors selling partial positions
offload them on a "first in, first out" (FIFO) basis, rather than allow them
to selectively liquidate shares bought at different prices.

Saunders received a statement from a spokeswoman at $4.4 trillion
money manager Vanguard, who said that the firm is concerned the
provision will "most likely increase significantly the amount of
taxable distributions made to investors every year."

One popular method that would take a hit is the so-called
"harvesting" of losses, which investors implement when they want
to cut the cord on a failed trade, in order to get some tax
relief. Under the new plan, if those same investors also have an
older holding in the same security, that's the one that would get
sold, regardless of whether it has a more beneficial tax profile.

With that said, it's still possible that the oldest holdings
would also be the most favorably priced from a tax perspective.
What's troubling to investment firms is the lack of flexibility.

As posed at present time, the change would take effect for sales
in 2018, and it's estimated to raise $2.7 billion over 10 years.
With that type of windfall, it's not particularly surprising that
the GOP would try to include the provision. But there's no
denying that the measure comes at the expense of investor
optionality.

Thomas Faust, the chief executive of Eaton Vance, a firm that
manages more than $400 million, has a broader take on the
provision. And it's not great for market efficiency.

"Markets will work less well," he told Saunders. "Our fund
managers will have their hands tied, and our shareholders will
owe more in taxes."